Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Beware These Tax Scams

The IRS won't fall for these schemes. Neither should you.

Our friends at the IRS annually issue a "dirty dozen" list of tax scams to avoid. Though some less reputable tax professionals may recommend or practice them, falling for these underhanded tactics is a great way to land yourself in a world of hurt.

All of these scams seem too good to be true, offering ways to escape paying some or most of the taxes you owe. Don't assume that the guy who put you in the position of doing something illegal will bear the entire risk of punishment. Get caught fudging your taxes, and you could face fines, or even prison.

Frequent defiersShady tax preparers will do just about anything to dupe you out of your money. In one common scam, the preparer promises you a boffo refund -- but in return, either charges you a steep fee, or collects a fat chunk of that refund. Before you agree to anything, make sure you know up front what your tax preparer will charge you.

Crooks will also try to use your fear of the tax man to dupe you out of sensitive information. A tweet or email that looks like it came from the IRS will demand that you click a link and submit your Social Security number and other details. Comply, and you can kiss your privacy (and perhaps a chunk of your bank account) goodbye. Just remember that if the IRS wants your information, it won't e-mail you for it.

Go abroad legallyMany people hope to keep money away from Uncle Sam by stashing it abroad. After all, lots of multinational companies, including 3M(NYSE: MMM), Dow Chemical(NYSE: DOW), and Kraft Foods(NYSE: KFT), have foreign subsidiaries that they can legally use to defer U.S. taxes. Others, such as Transocean(NYSE: RIG) and Halliburton(NYSE: HAL), have moved their headquarters out of the U.S. entirely.

Unfortunately, it's against the law for individuals like you to hide income in banks and brokerage accounts in other countries. Don't think the IRS isn't aware of this practice, or unable to investigate potential scofflaws. Clients of UBS(NYSE: UBS) found out the hard way that even Swiss bank accounts aren't beyond the reach of the tax man. If you've been sending money out of the country on the down low, a voluntary disclosure can reduce your chances of criminal prosecution.

If you want to put your money to work abroad without incurring the IRS' wrath, stick with legitimate investments like foreign stocks. Given the recent performance of many foreign exchange-traded funds, you won't have to hide your money to turn a tidy profit.

Don't be overgenerousSome people also try to hoodwink the IRS by reporting and deducting more than they're entitled to in charitable contributions. If you donate a used pair of 5-year-old socks that once cost you $10 to the Salvation Army, you can't count it as a $10 donation. You need to use the socks' current value, which is much less; items in fair or worse condition aren't even eligible at all. (The Salvation Army offers a valuation guide, pricing socks between $0.50 and $1.50.)

If you donate $250 or more to any charitable organization, make sure you have the receipt from the organization to back it up. The IRS doesn't take kindly to people who inflate the generosity of their charitable donations.

Play by the rulesEnterprising scammers can even try to cheat the tax man by contributing more than the legal limit into their IRAs. Sometimes advisors urge their clients to transfer appreciated assets into IRAs at less than their fair-market values. Such abuses are a real shame, since IRAs can serve you incredibly well when used legally.

Think twice before considering any shady tricks on your 1040 form. You'll be breaking the law, and chances are you won't get away with it. If you just want to pay less in taxes, there are plenty of legal ways to do so. You'll find plenty of money-saving tips -- all 100% on the up-and-up -- in our Tax Center.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian